Page 138 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes transactions. Accommodating transactions are undertaken for the deliberate (or explicit) purpose of
financing any imbalance in autonomous transactions.
Now, we are in a position to define BOP ‘deficit’ and ‘surplus’. A ‘deficit’ in the BOP occurs when the
autonomous payments (debits) exceed the value of autonomous receipts (credits); and a ‘surplus’
results when the autonomous credit receipts exceed the autonomous debit payments. If the two sums,
autonomous receipts and payments, are equal, we have an ‘equilibrium’ in the BOP. Alternatively,
the sum of accommodating transaction entered as credit in the International Liquidity Account is the
measure of ‘deficit’ in the BOP, while a similar entry in the debit column of that account, is the
measure of ‘surplus’ in the BOP. If, however, the International Liquidity Account shows entry of a
zero sum as credit or as debit, then there would be ‘equilibrium’ in the BOP of a country. A ‘deficit’ in
the BOP is considered, as negative or unfavourable or adverse BOP situation for the reporting country;
and a ‘surplus’ in the BOP is considered as positive, favourable or active BOP situation of the country.
BOP ‘equilibrium’ is considered as the desirable external economic state of affairs for any country. It
should be remembered that ‘balance’ (or ‘imbalance’) in the BOP is different from ‘equilibrium’ (or
‘disequilibrium’) in the BOP of a country. Strictly speaking, ‘balance’ is an accounting balance and it
must be there all the time for any country; ‘equilibrium’, on the other hand, can be there only when
the autonomous credit receipts equal autonomous debit payments. ‘Equilibrium’ is an economically
meaningful concept, whereas ‘balance’ is only an accounting or a book keeping term. In common
parlance the word BOP ‘balance’ is used interchangeably with the term BOP ‘equilibrium’, but the
difference between the two terms must be borne in mind. Similarly, the ‘imbalance’ is used
interchangeably with ‘disequilibrium’ in the BOP. Here again, strictly speaking, there can never be
an ‘imbalance’ in the accounting or book-keeping sense. ‘Disequilibrium’ is possible when there is
either a BOP deficit or a surplus. The more meaningful expressions would be BOP ‘equilibrium’ or
‘disequilibrium’ rather than BOP ‘balance’ or ‘imbalance’.
This brings us now to the question whether ‘deficit’ in the BOP is always bad and a ‘surplus’ in the
BOP always good as it is commonly suggested. While treating ‘disequilibrium’ in BOP as undesirable,
we generally tend to associate ‘disequilibrium’ only with a ‘deficit’. We, generally, consider BOP
‘surplus’ as good and, therefore, we do not identify ‘surplus’ with ‘disequilibrium’ i.e. something
that is as undesirable as deficit. As a matter of fact it can be argued that if ‘surplus’ is good, then
‘deficit’ could also be good in certain circumstances; and if ‘deficit’ is bad, then ‘surplus’ could as well
be bad for many reasons. The full significance of all these can be understood only when we understand
the two aspects of the BOP disequilibrium : viz. its location, and its duration.
First, consider the aspect of location. A surplus in the current account should be treated as generally
favourable but a surplus in the capital account may not necessarily be a good sign, because the former
(i.e. current account surplus) is a sign of earning capacity whereas the latter (i.e. capital account
surplus) only indicates a capacity to borrow. Borrowings, unlike earnings, entail commitments to
repay at some future date. We also know that it is better to earn rather than borrow and ‘enjoy’ a
current account surplus rather than a capital account surplus. Under some circumstances borrowing
may be good as well. If, for instance, a country has borrowed $100 million to invest in some useful
project, then such a borrowing is productive, because it will result sooner or later in both the GNP
increase and the increase in repaying capacity. The borrowing in that case has been self-liquidating
and GNP increasing as well. Viewed in this sense, BOP capital account surpluses may be good. It
would be tedious and unnecessary to spell out the practical implications of having BOP capital account
surpluses and using that surplus for unproductive consumption (or investment) which results neither
in the GNP expansion nor in repaying capacity for the country.
Similarly, for the ‘deficit’ case. A current account deficit indicates spendings in excess of earnings
with its obvious implications, while a capital account deficit would mean that the nation is undertaking
net foreign lendings. A mature creditor country like the United States would be incurring such capital
account deficits in BOP. Its effects on the US present BOP situation may be unfavourable; but sooner
or later, when the money that is lent out begins to come back together with the returns on that foreign
lending in the form of interest, profits, dividends etc., then it will produce favourable effects on the
US BOP in future.

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